Recently, the Federal government has reinstated a law that will have a significant impact on how we manage our estate. Beginning in 2011, the Federal government brought back the federal estate tax, which imposes a 35% tax on any estate exceeding $5 million, or $10 million for married couples.

An estate tax is defined as a tax imposed on your gross estate that exceeds the exemption limit. For example, if John dies leaving a gross estate of $6 million, his total taxable estate would be $1 million ($6M – $5M). Thus, his estate would pay $350,000 in estate taxes to the government ($1M x 35%). Note: only assets owned by you individually at the time of your death are included in your estate.

Although the common citizen may overlook this law due to the large required estate, it is important to note that many experts consider this $5 million exemption to only be temporary. By the end of 2012, it is widely speculated that federal lawmakers will revert back to the pre-2001 days, where there was only a $1 million exemption and a tax rate of 55%.

Whatever the exemption amount, there are certain tools at your disposal that can assist you in lowering your estate for purposes of avoiding the estate tax altogether, or lowering the amount of money that you will be required to pay to the government. The following are certain deductions that are available to reduce your estate taxes:

(1) Marital Deduction: any property transferred to your spouse upon your death is excluded from your estate;

(2) Charitable Deduction: donations made to a charitable organization are deducted from your estate (creating a charitable remainder annuity trust â€“ CRAT â€“ is beneficial in this regard);

(3) Irrevocable Trust: this is a trust that takes ownership away from you individually and transfers title to your trustâ€™s name; therefore, because you no longer claim individual ownership, the size of your estate is reduced.

The above options are effective means to help reduce your estate; however, you are not restricted to just those. That is why it is always advised that you consult with an attorney who is well-versed in estate planning and asset protection to ensure that you have structured a sound estate plan. Remember, although the exemption may not apply to you this year, there is a strong likelihood that the exemption limit will dramatically decrease by 2012. Plan now to be assured that you have the utilized the right tools to reduce your estate. After all, it is always better to pay your heirs as opposed to the government.

Adil Daudi is an Attorney at Joseph, Kroll & Yagalla, P.C., focusing primarily on Estate Planning, Shariah Estate Planning, Asset Protection, Business Litigation, Corporate Formations, Physician Contracts, and Family Law. To contact him for any questions related to this article or other areas of law, he can be reached at adil@josephlaw.net or (517) 381-2663.